Pacira BioSciences, Inc. (PCRX) Earnings Call Transcript & Summary

Good morning, everyone. My name is Balaji Prasad. I lead the Specialty Pharmaceuticals coverage for Barclays. Continuing on day 2 of our spec pharma track, I'm delighted to have the management team of Pacira with us. So from Pacira, we have Dave Stack, Chairman and CEO; and Charles Reinhart, CFO. Dave and Charlie, thank you for taking your time and joining us today.

Thank you for the opportunity.

Fantastic. So I think as we look now with the updates that you had recently, and you also provided the Feb monthly sales. The question that I have been getting in the past few weeks since the Q4 call is really about ZILRETTA. I think there still seems to be significant confusion over the manufacturing issues on the contract rates that you had and what it means for your 2020 outlook with ZILRETTA and even maybe some questions on the -- whether it was the right acquisition or not. Maybe you could start with that, addressing it and explain it.

Yes. There are no and have been no manufacturing issues since we took control of the company. The issues were some short-dated material that was sent to the marketplace before we actually closed on the deal. So we've got plenty of inventory, and so there is no "manufacturing issue." The issue of rebates is an issue and it's rapidly resolving itself, but the way it was run previously, there were large rebates that were expected at the end of a quarter that skewed the system because folks were buying way more inventory than they needed in many cases to get the maximum rebate and encouraged, of course, because the reps spend would get the maximum bonus. And so the whole system was a bit perverse. We're moving that to a typical system for us. And so it will be a discount that is an annual discount that's driven by the previous year's acquisition number of kits that are purchased. And you order it as you need it. There is no quarterly push or -- and we're more interested, frankly, in for commercial payers, our customers, the orthopedic folks and the sports medicine folks, their PSO looks more like 120 days. And so we'd much rather have people buy what they need for the next week or 2 and then provide dating in scenarios where it's required to help them use it in the time course of how they're reimbursed rather than buying big quantities at the end of the quarter, sending it back because they didn't use it, all the rest of that stuff. So it's quite a significant change in terms of the amount of work that's required because we will move it to a direct purchase where they will order in a normal course of business that will be picked up electronically sent to our wholesaler ICS and then drop ship the next day. But our gross to net on distribution is something in the neighborhood of 6%. Theirs was several times that. And so the business will come back into focus, and we think we can do a much better job for customers. Your last comment about whether the acquisition was the right one or not?

Yes. Because of these, again, the lingering uncertainties about [indiscernible] I think that's the question.

No, this we knew all about the rebate issue before we bought it. And I think we've shown people that the synergies are well beyond what would normally be expected in an M&A transaction. And so no, we're delighted that we have it. We see some very clear opportunities to add value. We think at the customer level, so we rather had is a J-Code for office use, iovera has a C-Code for HOPD use. And so in our view, we're providing these clinicians with the tools to personalize their care based on where that care is going to be provided. Does the patient at type 2 diabetes? Does the patient want no drugs? What's the duration of time before they're actually going to plan to have a surgical intervention? So all of those things give us a lot of comfort about where we are with iovera and then looking to work with the FDA on how you prioritize ZILRETTA for diabetic patients, we plan to do a shoulder study as we get to the end of this year. There's a number of things that we see here. And even in some of the disruptions around rebates and discounts, the product is doing very well.

Great. That's good to hear, Dave. And as I think about the revenue outlook for ZILRETTA, I think one of the things which was received positively was especially when you clarified my question on the call that concerns us where it stood for ZILRETTA was high and that it should come down, and it was received positively.

Pretty much so. Yes.

That was clear setting there. And so what do you think is the cadence going to be for ZILRETTA for the year between H1 and H2? And how much reset will we see in the earlier part of the year?

I think it's going to improve when we get to discounts over rebates and it's going to improve as we have a consistent level of customer care. The customers hadn't had any reliable interaction with the company for a very long period of time. And so we don't see any downside to anything that's going forward. I think what I tried to answer in response to your question actually was, if you think about ZILRETTA for this year in the context of EXPAREL as high teens to early 20s, something in that range. I think for this year, that's an appropriate number. I think we can look forward from there once we have a stable distribution network and customers are comfortable with us in terms of how they order and why they order. And I think we're very happy that we made this acquisition. There's always going to be some changes in the way things are done and some short-term pain. This is less than most.

Great. And I also think about the product now, once you saw the contract reset, maybe a question for you Charlie also is if you're looking at this as a traditional relaunch again of a product or a pullback contractors reset and then you just get on the business. And what does it mean in terms of incremental SG&A spend for the year?

So I think we've provided guidance on the total budget for this year. We don't view this as a relaunch in any way, shape, or form. The product performs very well. It's accepted in the market, and we continue to be very excited about it. So the sales force is already in place, those people, decisions were made very early in the ownership time line. And so I'm really pleased with the amount of implementation of the key decisions to integrate and we're looking for a really exciting year.

Fantastic. Shifting gears slightly towards EXPAREL. You provided your February monthly data yesterday. You had an average selling days of 117%, which definitely was a pickup from what we have been seeing in November, December, and January. And so what is the signal? Is it that you are seeing such pickup? How should we interpret those pick up in data? And this is something that we can expect as a problem with it through March and what you're seeing out of the ground?

You want me to take a shot, or you want to go? So I'm -- well, I mean, maybe to start at the highest level is what we see in the marketplace is very little impact other than psychological emotional for any COVID issues. The issue that still lingers although it is resolving is labor. And specifically, clinicians and especially orthopedic surgeons and spine surgeons have difficulty finding a nursing team that's willing to work at 12- or 14-hour shift on a Saturday. So I think that while we still have a peak demand from the perspective of patients coming back to the marketplace. We're going to be slower than we originally thought and being able to satisfy that demand at least at a price that the payers are willing to pay, which is a significant issue in the soft tissue marketplace. But -- and I think it's -- orthopedics is going to continue to get their business largely because there's a long relationship between the clinicians and their patients. And so the insurance companies would rather have those high acuity expensive high-profit margin procedures done in the less expensive ambulatory surgery center, where I think that things are going to be slower is in the soft tissue procedures where the profit margin is less. I can give you some numbers if it would help the group at all. But what you see basically is that the insurers are using a blended rate for what they could get this procedure unless just they were talking about hernia. And so the hospitals are in a position where the profit margin on hernia might be a couple of hundred dollars. And are you going to use 30 minutes of your OR time for $200 in profit? Or are you, in fact, even better just leaving it for a better opportunity that might come along? And I mean, just to give you the support of that, if you look at EXPAREL specifically, 75% of the EXPAREL-based ASC procedures are ortho. If you look at the hospital or the HOPD, that number is right around 50%. So you can see that the insurance carriers are driving the spine and the joint procedures to the ambulatory surgery center. And so until we have more ambulatory facilities built for orthopedics and spine, which is in progress. Patients are going to struggle to find a facility that can do a soft tissue procedure for what the commercial payers are willing to reimburse.

Got it. And probably a bigger question again. As we saw last year, you did provide some guidance in terms of at least resumption of surgeries, now we expect the 2021 surgeries to -- electives to come back on the cadence of that recovery. Granted it didn't pan out as we anticipated, multiple reasons. Now where is time now, would you feel comfortable in kind of giving us an insight into how 2022 could pan, labor shortage aside, how do you expect the elective recoveries?

Yes. So we just -- last week, we just got September '21's numbers. Just for everybody in the audience, we get this data by site of care and by procedure on a 6-month delay. So the first thing that was really interesting is that the total TAM grew by 9.1%, September '21 over September '20, which, to me, answers the first question. Are there more procedures coming to the marketplace? Absolutely. The general acceptance of the TAM growth on an annual basis is 2% to 3%. So this was a surprise to the upside in terms of the number of procedures. If you break that down and you look at where the procedures were done, hospitals minus 4, HOPD plus 12, ASC plus 18. If you look at EXPAREL inside those numbers, hospital plus 4, HOPD plus 35, ASC plus 45. So you can clearly see we're in the right ballpark in terms of where we're going and how the product is growing relative to where the marketplace wants to go. I think we're just in that interim period where the insurers are pushing patients to an environment that is fully satisfied in terms of bed capacity right now and it's going to take us a little bit of time to have these new facilities. There's 26 new orthopedic spine facilities being built in the U.S. right now. So that will take a lot of that pressure off and open up some opportunity for folks to fill in around the gaps with soft tissue, but today, that doesn't exist.

Fantastic. And I think you have been calling out the tissues and soft tissue at least now in the last couple of calls and as I think about it. So where do you stand in terms of penetration versus [indiscernible] comparison within these indications broadly?

It's -- again, it's almost entirely driven by the availability of regional anesthesia. So when you -- and it's different for each of the procedures. So for example, women's health is growing very quickly, driven a lot by COVID. Mom and baby didn't want to be in a COVID environment. I guess we all implicitly understand that, right? And then the halo effect of that around mastectomies and breast reconstruction and cervical and ovarian cancer, et cetera. So women's health has become a very important element for us, and that takes most of these patients back to the hospital because there is no site of care available for a large resection in an ambulatory environment or having a baby. Folks are talking about birthing centers and stuff, but we don't have any of them yet, right? And so if you look at the way the mix is delivered in the marketplace, women's health [ in piece ] are largely still delivered in the hospital environment, even though that is moving to the regional approach, maybe in a more organized way, I mean, there's 3 real buckets that we have to address growth as we go forward from there. Almost all of our growth is from regional anesthesia. So it's TAP blocks and erector spinae blocks and pec blocks and all the different things that guys are doing now. And so we're building another. We have the pit innovation and training center. We're building another in Houston. Hopefully, that will be available by the end of the summer. And so training on the use of advanced imaging and having the folks that are coming out of all of the fellowship programs are imaging train, that's really important to us as this continues to grow as a standard of care for anesthesia. The second piece is reimbursement. We are aggressively pursuing HOPD for EXPAREL, both legislatively and through the normal CMS opportunities. And so that would be a very important aspect of improving EXPAREL reimbursement. Behind that is iovera reimbursement and for ZILRETTA, probably not a lot to do. The vast majority of that business is still in the office where they have a J-Code. And then lastly, it's just a consistent flow of new information. And so with EXPAREL, we've got lower extremity nerve block. We're talking to the FDA about going down to patients who are 2 to 6. Right now, our limitation is 6 and above. And with iovera, there will be a paper that comes out here shortly that talks about 40 patients from a prominent orthopedic surgeon, iovera plus EXPAREL opioid-free. A lot of interest about using what the marketplace is calling the secular money to improve education and training around opioid-free opportunities. And so we're starting to see a lot of that and then prepare we should have the interim report next month. And then for ZILRETTA, as I already mentioned, we do a shoulder study. There are some folks in the marketplace that are trying to encourage us to do a hip study. So that third bucket is how do we continue to advance the art by providing a constant flow of information for all of the products.

Great. Probably one thing that I want to pick up and to explore is the pediatric launch that you had last year. You said you did want to have a slow launch, a measured launch. And where do you stand in that adoption curve now? And are there any indications where you're seeing this being the standard of care? And lastly, tying up with that is your comment on pediatrics being $100 million opportunity, is there, again, scope to see that this could be a much larger opportunity than what you emphasized?

Yes. When we forecast -- I mean, we -- there were 2 things, I think, where we didn't fully -- well, where I could have done a better job, I guess, is probably the candid way to say it. One was we forecast off of the adult population and what we see in the pediatric population is things like club foot and scoliosis and things like that are really the places where there's an intense interest in pain control and where we gain very significant market share rather than the percentage ways that we forecast. The other is the opportunity to treat the child and have them go home. The pumps and catheters, I think, kept that from being a reality in many cases previously. But now with EXPAREL, as a matter of fact, last week, we had the first case that I'm aware of, where a hospital sent back all of their pump and catheter systems because they were out of date, and they have no intention of using them at all anymore. So we had no awareness that hospitals were going to adopt EXPAREL versus a pump in a catheter at a rate of near 100%. And so to answer your question, generally, we would expect it to take 5, 6 years to reach peak. I think here, especially if we get kids down to 2, and there's some work that's being done with the FDA around peripheral nerve blocks, for sure, $100 million would be a conservative estimate today.

Okay. And peak kind of takes us to your vision 2025, your goal of $1 billion of revenue. So it would be an incremental upside to those, I'd think.

Yes. Modest in that context. It's not going to be -- you understand, right? A lot of the numbers.

And I think the other issue that was I think failing focus a couple of months ago, probably not so much now is the IP landscape around EXPAREL once you had the Paragraph IV file in the last quarter. And of course, you did expand the IP around it. And where do you stand on that case now?

Yes. Thank you. Two things actually. One is we've got 4 additional Orange Book-listable patents, 2 have been listed. The other 4 will take another couple of months, but we will have 6 Orange Book-listed patents that go out to January of 2041. So we've got a very long runway. I think really important and very, very new information is that the Chinese Paragraph IV filer, there was some question around whether they had a multivesicular liposome or not relative to the FDA guidelines. It turns out that they got a CRL from the Chinese authorities, and it is very specific to a multilamellar liposome. So as we suspected, they don't have any opportunity to make a generic multivesicular liposome anything. And so very good news on both fronts for us. And we are even more confident that there will not be a generic EXPAREL or not multivesicular liposome of any kind as we sit here today.

Got it. So for all practical purposes there is no generic threat at this point. And of course, you still have your IP going up to 2040s?

That's correct.

Great. Shifting slightly towards iovera, probably that's one point where one data where you've probably not been as successful as you would like to, as we have seen in EXPAREL. I mean, my conversation with investors clearly EXPAREL remark, investors comments, and you've probably seen that in the way stock has reacted to, but iovera is not there yet. What do you need to do to get iovera there now and also maybe 2025 target for?

Yes. Fair enough. You would not be surprised if you knew that we weren't happy with where we are either, right? I mean we've had 2 soft launches, both times we ran right into COVID. So not to make it an excuse, but the frank reality is that we had a new sales force with a relatively new way of doing business, and we went into an opportunity where it was very difficult to have face-to-face with our customers. I would tell you that the people who use the product like it a lot. I think we've been slow to advance the cash aspects of it for people who the cases that we talk to regularly somebody that wants to dance at their daughter's wedding. Somebody that wants to go over to Europe on vacation, those kinds of cash opportunities and our market research are actually bigger than the reimbursed opportunities in hospitals, et cetera. We are developing another generation of -- while we continue to develop another generation of devices that are more reliable, what we bought, frankly, was not appropriate for a broad launch in the United States. And we continue to develop new tips. We are just putting a medial branch block tip into human consideration for low back pain. And so we have one that will be for a specific spine indication. And then if you look out just a little bit, the way we're developing stellate ganglion blocks now and just for the audience stellate ganglion on both sides of your thinking the carotid area, being able to turn the afferent pain signal off from the brain to the body allows you to have an impact in a number of different opportunities. The first one that we're seeing at least in broad commercial application is for stellate ganglion block for cardiac arrhythmia. These patients who suffer through a catecholamine storm following an open-heart procedure. We can turn that off for a short period of time by turning off the sympathetic nervous system with EXPAREL. The real interest is in turning it off for a long period of time with iovera. And the reason for that is the experts in the space believe that the sodium channel that was destroyed by a stroke or inappropriate deployed for a CP patient actually regenerates, if you give it several months to be able to do so. So for stellate we think that the answer over long term and the high-profile areas will be iovera. And clearly, for spasticity, the answer is iovera. And we're out 2 years now with patients who have had strokes or have had cerebral palsy or a number of different inflections. And these patients do fine with a -- in many -- in most cases, a single administration of iovera. So we're working with the very similar to the pediatric launch. We're working with the KOLs. We want them to get experience. We want them to perfect the device itself and the needle length and tip and all the rest of that. And so we will come with a program around treating the pain associated with spasticity with iovera, that's currently in the indication, right? It's indicated for peripheral pain. And then we're working with the FDA on what would an indication look like for spasticity itself. And our guess is that it will probably be a randomized controlled trial with BOTOX being the comparator would be our guess.

Great. We look forward to that. I want to use the time also to get a question across to you Charlie. So 1,000 basis of gross margin expansion, 300 basis of gross margin expansion this year. And as we think about it, I mean, generating a significant amount of cash clearly brings up the question what next. And how was the -- what's your capital allocation strategy going to be towards tuck-in? Or at some point, are you going to consider any larger acquisition? What will you do it with the cash?

Sure. So Balaji, we have a very active business development effort. And if we found another tuck-in, I think we'd like to do that. There aren't that many of those out there. So let us know if you know of one. The other BD activity tends to be investing in earlier-stage products filling some of the regenerative medicine type of applications that we're interested in along the same customer base and patients, frankly. But we're going to pay off the principal of $160 million in our April 2022 notes, just like we promised investors we would. That will be done in a couple of weeks. We have a term loan B that we'll pay down over the next 3 years probably. And we're going to start building a lot more cash in the bottom line. So I think we're in a really good position from a capital structure perspective.

Great. With that, we're out of time. So Dave and Charlie, thank you so much for your time this morning. And I wish you a very productive conference.

Thank you very much. Thanks for the opportunity.